C. Non-financial disclosures
5. Members of the board and key executives
Ethics management is important to the promotion of good business practices, transparency and risk reduction. As ethics management becomes more common in enterprises, the existence of its key structural features is an important area of disclosure. It is noted that, with the exception of some countries such as the United States, no general or international best practice has yet been established in this area.
Nevertheless, some possible features subject to disclosure might include: the existence of a senior ethics officer and that person’s responsibilities; the existence of an ethics committee and its relationship to the board; policies for breaches of the ethics code, including reporting mechanisms and 'whistleblower' protection mechanisms; and policies on the dissemination and promotion of the ethics code.
5. Members of the board and key executives
Directors in the United States) or knowledge of business and financial technology (e.g. the Brazilian Institute of Corporate Governance).
There should be disclosure of the types of development and training that directors undergo at induction, as well as the actual training directors received during the reporting period.
Recently, some countries have started to require specific training for directors.
For example, in India, the Companies (Amendment) Bill 2003 makes director training mandatory. The Naresh Chandra Committee on Corporate Audit and Governance, also of India, recommends training for independent directors and disclosure thereof.
The group suggested that the board should disclose facilities which may exist to provide members with professional advice. The board should also disclose whether that facility has been used during the reporting period.
The group realized that, on certain legal and financial matters, directors might discharge their duties more effectively if allowed access to independent external advisors, for example legal and financial experts. If used correctly, access to external expertise can enhance the ability of directors to fulfil their duties properly. In New Zealand, for example, it is considered vital for directors to have access to independent advice, and therefore this principle is stated in that country's Companies Act. The Merged Code in Belgium also points out the need for an agreed procedure for using external expertise, a point also mentioned in the Dey Report (Canada), Vienot (France), Mertanzis (Greece) and Olivencia (Spain) reports. Best practice suggests that, whatever approach is used, the approach should be disclosed.
Evaluation mechanism
The ad hoc group agreed that the board should disclose whether it has a performance evaluation process in place, either for the board as a whole or for individual members. Disclosure should be made of how the board has evaluated its performance and how the results of the appraisal are being used. Along with the duties and responsibilities of directors, shareholders will need to know how directors were evaluated, what criteria were used and how they were applied in practice, particularly with reference to remuneration.
CACG Guidelines stress that evaluations should be based on objective criteria.
The IAIM Guidelines (Ireland) and Preda Code (Italy) leave to the remuneration committee the selection of appropriate criteria and the establishment of whether these criteria have been met.
An important aspect of performance is the attendance of directors at board and committee meetings. Specific requirements regarding the frequency and procedures of board meetings can be found, for example, in the Indian Code, the King II Report and the Combined Code of United Kingdom.
Directors’ remuneration
The ad hoc consultative group took the view that directors should disclose the mechanism for setting directors’ remuneration and its structure. A clear distinction should be made between remuneration mechanisms for executive directors and non-executive directors. Disclosure should be comprehensive to demonstrate to shareholders and other stakeholders whether remuneration is tied to the company’s long-term performance as measured by recognized criteria. Information regarding compensation packages should include salary, bonuses, pensions, share payments and all other benefits, financial or otherwise, as well as reimbursed expenses.
Where share options for directors are used as incentives but are not disclosed as disaggregated expenses in the accounts, their cost should be fully disclosed using a widely accepted pricing model.
The current level of disclosure relating to directors’ remuneration varies widely. However the trend appears to be towards greater levels of disclosure in this area, especially in Europe: France, Germany, Luxembourg, the Netherlands, Switzerland and the United Kingdom have all introduced laws to enforce the disclosure of directors' individual remuneration. In the United Kingdom, for example, the report of the company’s remuneration committee must identify each director and specify his or her total compensation package, including share options. Recently added regulations also require companies to put their remuneration report to a shareholder vote at each annual general meeting. Other examples of this practice exist elsewhere in the world. The Indian Code, for instance, requires disclosure about remuneration in a section of the annual report on corporate governance, in addition to suitable disclosure on director's remuneration in the profit and loss statement.
The group discussed the fact that the length of directors’ contracts, the termination of service notice requirements, as well as the nature of compensation payable to any director for cancellation of a service contract should be disclosed.
Specific reference should be made to any special arrangement relating to severance payments to directors in the event of a takeover.
Succession planning
The group took the view that the board should disclose whether it has established a succession plan for key executives and other board members to ensure that there is a strategy for continuity of operations.
OECD Principle IV.D.2 stresses that overseeing succession planning is a key function of the board, while the Dey Report (Canada) considers it an important stewardship duty of the company, and the Vienot Report I (France) recommends that the selection committee be prepared to propose successors at short notice. While specific details regarding potential successors might be the subject of confidentiality, the existence of a procedure and a preparedness to appoint successors as necessary is not confidential, and should be the subject of disclosure.
Conflict of interest
The group suggested that conflicts of interests affecting members of the board should, if they are not avoidable, at least be disclosed. The board of directors should disclose whether it has a formal procedure for addressing such situations, as well as the hierarchy of obligations to which directors are subject.
Conflicts of interest are required to be disclosed by law in many countries. The critical issue is that all conflicts of interest should be disclosed, along with what the board decided to do regarding the specific situation and the relevant director involved.
6. Material issues regarding stakeholders, environmental and social stewardship